Types of business risk

Risk is a part of business. We breakdown what goes into a risk profile and the different types of business risk. Learn more.

woman assessing business risk

Risk is a part of business. It goes hand-in-hand with the very nature of starting your own company, present in every stage of a business’s lifespan. Yet, working for yourself, mastering your own universe, building a company that continues to pay dividends well after you’ve stopped piloting it—most would agree the risk is worth the reward.

Given that 9 out of 10 startups fail, it’s important to have the right strategy. To sail through the volatile oceans of risk and surface beneath clear skies, your company will need a strong leader, long-term vision, high-quality products (or services), and a dedicated team.

Lastly, you’ll need a risk profile.

What goes into a risk profile and what are the different types of business risk? Let’s answer these questions and more.

The different kinds of business risk

Every business is going to have its own risk profile. This is one of the primary resources used when creating a business plan and operational structures. And it’s what insurers use when evaluating how risky it is to provide coverage for a given company.

For instance, you could imagine that a local restaurant faces risks when it comes to securing their produce. If it’s not affordable and fresh, then they can’t sell their product. Additionally, a company working in healthcare that deals with private patient information faces compliance risks. These could be technical, digital, or physical risks if sensitive information is stolen.

Yet, at the end of the day, most of these risks (no matter what kind of business they apply to) fall beneath the same categories:

  • Economic
  • Compliance
  • Operational
  • Fraud & Security
  • Financial
  • Reputational
  • Strategic
  • Human

Economic risk

The market fluctuates—it’s a fact of life. When a certain fluctuation occurs, it (typically) yields positive and negative changes in different environments. Take oil, for instance. With the economic impact of COVID-19, it dropped below $22 a barrel (WTI Crude), making it incredibly difficult for oil companies to meet their margins.

Yet, the risk has nothing to do with the way oil companies are operating. It’s due to changes in the economy. This is a direct economic risk.

Compliance risk

Businesses need to comply with the laws and regulations of the territories they operate in. This becomes exponentially more complicated when it comes to international companies. Failure to comply with federal and state regulations can result in taxing penalties. From financial loss, criminal charges, to being completely shut down, a business needs to follow the laws.

Operational risk

Every company faces operational risks (or problems and mishaps that can halt operations). If you run a restaurant and the kitchen catches fire, what happens? You would have to close the doors until you could fix the damage and get the kitchen fully operational.

Picture any company across any industry. If a group of employees quits, it’s likely that this would result in the same financial consequence (at scale). Operations would wane, resources would need to be allocated to staffing up, and the company wouldn’t be able to operate healthily.

Fraud and security risk

With the amount of data in constant circulation, today companies and small business operations are more exposed than ever to security breaches, cyberattacks, and payment fraud. For instance, RiskIQ states that over $17k is lost every 60 seconds at the hands of phishing attacks. When it comes to companies that handle sensitive client information and run credit cards, this is a massive part of their risk profile.

Take Equifax, for example, which suffered a data breach that left 147 million consumers exposed. Even in planning for the risk, their safeguards were not enough to prevent this tragedy. Additionally, you might find it surprising that data breaches and cyberattacks are just as big of a problem for small businesses.

Financial risk

Most companies have a budget. From large companies trying to sustain cash flow to startups that only have about 12 months of runway, mitigating debt and keeping enough cash in the bank is paramount to a business’ success.

If you’re dependent on two clients’ revenue streams to sustain operations, then you risk failing when one of them cancels their service. If you’re not generating revenue at all, then you risk burning through your cash before your platform is off the ground.

Reputational risk

In the age of digitization and virality, “word of mouth” can spread like wildfire. And due to misinformation plaguing every street corner of the Internet, just one unhappy customer can damage a brand’s reputation. Additionally, a negative tweet, lawsuit, product failure, bad piece of press, or a post that goes viral can hinder business growth and negatively affect sales.

Strategic risk

Did you know that Startup Genome published a report which stated that 70% percent of tech startups fail due to premature scaling? When it comes to building a business, there’s always a strategy involved. Should the leaders of the company deploy an initiative that ends up hurting the company, then (typically) they failed to account for the risk involved with their decision.

This is “strategic risk.”

Human risk

While every business owner wants to put their full trust and faith in their employees, the reality is that people make mistakes. And sometimes, people commit crimes. From behavioral, criminal, and negligence issues, your employees—through their actions—can directly impact your business. For instance, they might fall for a phishing scam and cause the business a financial loss. They could embezzle a client’s money or steal from the business itself.

Human risk, even that of the business owner, is always present in risk profiles.

Business insurance: protecting small businesses against risk

If you’re a business owner that just read through this list, you probably related to a few risk categories. If you’re not a business owner, then the same risks apply to many facets of your life. Business insurance with Thimble protects small businesses from risks to third parties like:

  • Bodily injury
  • Personal and advertising injury
  • Property damage
  • Professional negligence
  • Errors and omissions

We make insurance simple. With our general liability insurance and professional liability insurance policies, you can get a quote, get insured, then get back to work in less than 60 seconds. Just download the Thimble mobile app or click “Get a Quote” to start. It’s really that fast. Risk is often cause for worry. But with Thimble, it doesn’t have to be. We’re here to help ensure you understand the risks your business faces and the actions you can take to protect yourself. Because protecting your business means helping it grow.

Sources:

Our editorial content is intended for informational purposes only and is not written by a licensed insurance agent. Terms and conditions for rate and coverage may vary by class of business and state.

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